Inflation in Saudi Arabia to exceed 4pc in 2008

The growing number of foreign workers in the largest Arab economy will drive up rents, while the weakening dollar will make imported goods from Europe more expensive, Monica Malik, an economist at EFG, said in a note, received yesterday via e-mail.

Saudi Arabia chose not to follow the U.S. Federal Reserve when it cut its benchmark interest ratAe Sept. 18, as it seeks to tackle record inflation in the kingdom. Consumer prices rose an annual 4.4 in August, compared with 3.8 per cent in July.

"Imported inflation has increased due to the fact that most imports originate from Asian and EU countries, and the cost of imported goods increases when the U.S. dollar weakens,'' Malik, said in the note.

Rising inflation in Saudi Arabia, and the kingdom's decision not to follow the Fed's rate cut has heightened investor speculation that it will drop the riyal's peg to the dollar.

Saudi Arabia will maintain its peg to the dollar in the "short term,'' Malik said. "While a revaluation of the riyal would be positive in reducing imported inflation, the impact of this inflation on the economy is relatively benign.''